The biggest risk to the U.S. stock market rally since Donald Trump won the presidency may turn out to be something the new administration can't do anything about, Allianz's chief economic advisor Mohamed El-Erian told CNBC on Monday.

El-Erian said on "Squawk Box" the problems with economies around the world could lead to a higher dollar — thus squeezing the profits of Corporate America by making U.S. goods more expensive overseas and increasing "the risk of protectionism."

"Keep an eye on the dollar," the former Pimco co-CEO advised, saying Europe's ability to get its economic act together is "key to sustaining" the U.S. stock market rally.

The dollar index against a basket of major currencies has gained about 4.5 percent since Election Day, which could test Trump's promises to make U.S. manufacturing more competitive.

The anticipation of the second Federal Reserve interest rate hike in the past decade, which actually happened in December, has also helped push up the dollar.

If the dollar remains in check and Trump's pro-growth policies of tax cuts and business deregulation become reality, the U.S. stock market is set up for a further rally, El-Erian said.

"Things are aligning well for the market. The economy has a solid foundation. Policy is getting more pro-growth, and Congress is getting more functional," he said. "That's good for the U.S. economy. It's good for the markets."

El-Erian said concerns about whether tax cuts would drive up the deficit too much are overblown because higher economic growth means the nation can stand "a bigger balance sheet."

"To the extent that the deficit is caused by pro-growth measures I worry a lot less. We have space, fiscal space. But we have to use it intelligently," he said.

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